When Cheaper Isn't Better

Governments are beginning to look at energy and other life-cycle costs in their purchasing. It's about more than saving money.
by | February 25, 2013
 

In 2010, the Florida Department of Law Enforcement needed a new air-conditioning chiller unit for its headquarters building in Tallahassee. The model the state's Department of Management Services chose cost $450,0000--$60,000 more than the cheapest option. But the agency had a good reason for paying more.

The model it selected is anticipated to save $658,000 in total cost of ownership (taking into account factors including not only initial cost but also energy and maintenance expenses as well as the unit's scrap or resale value) over its expected 25-year lifespan compared to the cheapest version. Reduced energy costs alone in the chiller unit's first year of operation were expected to save $40,000 over the cheaper but less efficient model. The bottom line is that even if the cheaper unit had been offered by the manufacturer for free, the chiller the state ended up buying would still have cost the taxpayers less in the long run.

What Florida officials are practicing, the result of a 2008 state law, is life-cycle cost analysis (LCCA), an approach to purchasing that's been gaining favor among governments at every level. In fact, it's been the standard for the federal government since 2000, when President Bill Clinton signed an executive order mandating its use in federal procurement.

Nonetheless, there are formidable barriers to widespread adoption of LCCA throughout government. Perhaps foremost is the requirement to award a contract to the lowest bidder that remains part of so many government procurement laws and regulations. And a barrier that shouldn't be underestimated is a lack of motivation to use LCCA when its financial gains will accrue long after the current procurement official is gone.

There are other impediments as well. A recent International Institute for Sustainable Development report, for example, highlights non-budgetary issues ranging from "research gaps" in the application of LCCA to "lack of competence" in conducting life-cycle analysis and "lack of tools and data to do it properly."


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Bob Graves  |  Associate Director of the Governing Institute
bgraves@governing.com

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